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Disagreement and equilibrium option trading volume

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  • Mark Cassano

Abstract

Using a complete market equilibrium model, we present results concerning the effect disagreement has on equilibrium option trading volume and positioning. We find that if agents agree on volatility, total option volume is independent of wealth distribution and average optimism. We also find option volume increasing in drift disagreement and decreasing in risk aversion and volatility. Pessimists are shown to write most options. With volatility disagreement, the results are less clear; however, we show agents with high volatility beliefs write deep out of the money options and buy close to the money options. Numerical comparative statics are also performed. Copyright Kluwer Academic Publishers 2002

Suggested Citation

  • Mark Cassano, 2002. "Disagreement and equilibrium option trading volume," Review of Derivatives Research, Springer, vol. 5(2), pages 153-179, May.
    • Handle: RePEc:kap:revdev:v:5:y:2002:i:2:p:153-179
    DOI: 10.1023/A:1016583612942
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    Cited by:

    1. Jinbeom Kim & Tim Leung, 2016. "Impact of risk aversion and belief heterogeneity on trading of defaultable claims," Annals of Operations Research, Springer, vol. 243(1), pages 117-146, August.
    2. Mark Cassano & Bing Han, 2008. "Option volume, strike distribution, and foreign exchange rate movements," Review of Quantitative Finance and Accounting, Springer, vol. 30(1), pages 49-67, January.

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